New information released Wednesday on the holdings of U.S.-based multinational corporations is adding fresh ammunition to the dispute over whether companies should be given a tax holiday on repatriated foreign profits.
Large multinational U.S. corporations with substantial offshore funds have placed nearly half of those funds in U.S. bank accounts and U.S. investments without paying any U.S. tax on the foreign earnings, according to new data released by Sen. Carl Levin, who chairs the Senate’s Permanent Subcommittee on Investigations.
Levin has introduced several pieces of legislation over the years aimed at closing offshore tax loopholes (see Senators Introduce Bill to Stop Offshore Tax Havens). His latest information is included in an addendum to an earlier report from October 2011.
“Some multinational corporations say they want to bring foreign funds back to America, but can do it only if they get a special tax break,” Levin said in a statement. “They claim their foreign funds are otherwise ‘trapped’ abroad, but new data show that is not true. Many U.S. multinationals have already invested a large portion of their foreign funds right here in the United States, taking full advantage of the safety and security of the U.S. financial system to protect their money while paying no U.S. taxes on those funds to support the U.S. system.”
Earlier this year, a survey was sent to 27 U.S. multinational corporations and found they held more than half a trillion dollars in tax-deferred foreign earnings at the end of fiscal year 2010. The survey also found that 46 percent of those foreign earnings—almost $250 billion—was maintained in U.S. bank accounts or invested in U.S. assets such as U.S. Treasuries, U.S. stocks other than their own, U.S. bonds, or U.S. mutual funds.
The survey also found that corporations varied widely in the extent to which they placed foreign earnings in U.S. assets. Nine of the 27 companies, or one-third, including Apple, Cisco, Google, and Microsoft, held between 75 and 100 percent of their tax-deferred foreign earnings in U.S. assets. Eleven corporations invested 25 percent or less of their tax-deferred foreign earnings in U.S. assets. This survey information is the first to provide data showing the amount of tax-deferred offshore corporate earnings that are maintained in the United States.
When asked why they invested their foreign funds in U.S. assets, several of the surveyed corporations offered explanations centering on the economic strength of the United States compared to the rest of the world. They pointed to the safety and security of the U.S. dollar and other U.S. assets, suppliers who preferred to be paid in U.S. dollars, and the ability of the U.S. currency to maintain its value over time better than other currencies.
“Right now, U.S. multinationals are benefiting from the stability and security that U.S. banks, U.S. investments, and U.S. dollars provide without paying their fair share to sustain our economy,” said Levin.
Corporations are able to invest their foreign earnings in U.S. assets without treating them as “repatriated” and subject to taxation, because the federal Tax Code, specifically Section 956(c)(2), already allows U.S. corporations to use foreign funds to make a wide range of U.S. investments without incurring tax liability. If those U.S. investments then produce income, that additional income may be subject to taxation.
That $250 billion of foreign funds are invested in U.S. assets shows U.S. corporations are already well aware of the Tax Code provision allowing them to return foreign earnings to the United States on a tax-free basis, Levin contended.
“Not content with that existing tax benefit, a group of multinational corporations is fueling a major lobbying effort to obtain still another repatriation tax break,” he said. The tax break would allow them to return earnings to the United States, without the same investment restrictions, at a dramatically reduced tax rate, as low as 5.25 percent instead of the normal rate of up to 35 percent, he noted.
A group of multinational corporations has been pushing for a tax holiday on repatriated foreign earnings as part of the Win America Campaign, saying it would bring $1 trillion back to the U.S. economy. Repatriation legislation has been introduced in both the Senate and the House (see McCain and Hagan Introduce Repatriation Tax Holiday Bill and Congressional Bill Would Provide Tax Holiday on Corporate Profits Repatriation). An academic study was released Tuesday that also refutes the claims of repatriation proponents (see Study Debunks Tax Repatriation Holiday Claims).
Levin noted that corporations that use Section 956(c)(2) of the Tax Code to bring tax-deferred foreign earnings to the United States can already make a wide range of investments on a tax-free basis, but cannot purchase their own corporate stock or invest in their own businesses, such as by building a new plant. Foreign earnings used for those purposes would instead be treated as repatriated and subject to normal corporate tax rates. An earlier report released by Levin showed, however, that corporations were unlikely to use repatriated funds for those purposes. Corporations wishing to make such investments could also use their domestic cash holdings.
The 27 U.S. multinationals surveyed by Levin’s subcommittee reported holding a total of $538 billion in tax-deferred foreign earnings at the end of FY2010. By comparison, in mid-2011, all U.S. corporations held tax-deferred foreign earnings totaling an estimated $1.4 trillion.
Those tax-deferred foreign earnings are in addition to the overall domestic cash holdings of U.S. corporations, which the Federal Reserve has recently estimated at $2 trillion. “U.S. multinationals, as a whole, have record amounts of domestic and offshore cash,” said Levin. “American companies who say their funds are ‘trapped’ abroad ought to be investing their domestic funds to get the economy rolling, instead of pushing for still more tax breaks.”
The survey results are presented in an addendum to an earlier report from October 2011. As a result of the survey data, the addendum concludes that U.S. corporations are already returning offshore funds to the United States without paying taxes on those funds, they are already taking advantage of the security and stability of the U.S. financial system without paying U.S. taxes on those offshore funds, and a new repatriation tax break would raise additional tax fairness issues.
The October report focused on a previous repatriation tax break, in 2004, examining the 15 corporations that claimed the largest repatriation tax deductions. The October report found that, despite repatriating $150 billion at the extremely low tax rate of 5.25 percent, the 15 repatriating corporations did not add jobs or increase research expenditures, and instead increased their spending on stock buybacks and executive pay. The report concluded that a repeat repatriation tax break also would not boost jobs or research expenditures, but would encourage firms to keep more cash overseas in hopes of future tax breaks. The report also found that multinationals had significantly increased their offshore cash holdings since the 2004 tax break.
The Win America Campaign disputed Levin’s report. “The fact that foreign subsidiaries of U.S. companies have deposits in U.S. banks or in U.S. bonds does not mean that their American parent companies are able to deploy these funds in the U.S. economy,” said an email from the group. “Like any other foreign company, foreign subsidiaries of U.S. companies are able to utilize the U.S. banking system, but it would be better for the U.S. economy if American companies could actually put this money to work in our domestic economy. Even these U.S. deposits will eventually be spent overseas without a change in our tax laws. Senator Levin’s one-sided, partisan report does nothing but attempt to score rhetorical points while U.S. profits continue to be invested around the world instead of here at home due to a seriously flawed Tax Code.”
The campaign emphasized that the $1 trillion of earnings are “absolutely overseas,” adding that the earnings are trapped in the foreign subsidiaries of American companies and may not be returned to the United States parent for unrestricted investment in the U.S. economy without significant adverse costs under current U.S. tax law.
Under current U.S. tax law, global American companies are only permitted to hold their earnings in very limited types of U.S. property, such as obligations of the United States and deposits with U.S. banks, without imposing tax on their U.S. parent, the group noted. The aggregate amount of global American companies’ earnings held in the very limited, permitted types of U.S. property is, in any event, unknown.
“There is a fundamental difference between loaning global American companies’ earnings to the U.S. government, holding them as deposits in U.S. banks versus allowing the U.S. companies to freely deploy these earnings/cash directly into the U.S. economy,” said the group. “There is little, if any, stimulus effect to loaning money to the U.S. government or holding deposits in U.S. banks. In contrast, a significant positive stimulus effect would result from allowing the private sector—global American companies, which directly and indirectly have an enormous impact on the U.S. economy—to deploy these earnings without restriction into the U.S. economy. “
Win America cited a recent study by former Congressional Budget Office director Douglas Holtz-Eakin, which estimated that a new temporary repatriation incentive would increase GDP by $360 billion and create 2.9 million new U.S. jobs, and another recent study by former Council of Economic Advisors chair Laura Tyson and Ken Serwin estimating that a new temporary repatriation incentive would increase GDP by between $178 billion and $336 billion and create between 1.3 million and 2.5 million new U.S. jobs.
Congressman Kevin Brady, R-Texas, a repatriation proponent whose Freedom to Invest Act, has 104 House sponsors, also took issue with Levin’s report.
“What stimulative effect is there to trapping American profits in U.S. debt rather than allowing them to be injected directly into our economy to create new jobs and fund new research, buildings and business expansion?” said Brady, a senior member of the House Ways and Means Committee. “Regardless of where the money is physically located, the bottom line is that these earnings are trapped in the foreign subsidiaries of American international companies and effectively blocked from being invested in America’s struggling economy. It makes no sense, especially with 25 million American workers who can’t find a full-time job.”
Brady also noted that as with Levin’s first report, no Senate Republican signed today’s report. “Partisan attacks on a bipartisan solution like repatriation won’t get America’s economy back on track,” he said.